Annex 4D.2. Economic and Financial Analyses - a Worked Example

Transcription

1 Annex 4D.2 Economic and Financial Analyses - a Worked Example

2 CONTENTS 1 WORKED EXAMPLE/ CASE STUDY LAYOUT OF THE CASE STUDY TRABZON AND RIZE MUNICIPALITY FINANCE INVESTMENT PROGRAMME INVESTMENT COSTS OPERATING COSTS UNIT COST INVESTMENT FINANCE Introductory Comments Suggested Financing Alternative Financing Scenarios Debt Service Schedules Environmental Pollution Prevention Fund (EPPF) Credits COST RECOVERY AND TARIFF LEVELS Cost Recovery and Cash Flow Objectives Tariff Requirements Sensitivity Analysis SOURCES OF REVENUE Introduction Alternative Revenue Sources AFFORDABILITY ANALYSIS 24

3 1 WORKED EXAMPLE/ CASE STUDY To complement the text on economic and financial analysis in Step 4E, this shortened and adapted, real-life example has been included in the Guide. Annex 4E.2 provides an analysis of the financial implications of a proposed waste disposal strategy for the Trabzon and Rize region in northern Turkey. 1.1 LAYOUT OF THE CASE STUDY Section 1.2 provides an overview of expenditures and revenues for the Trabzon and Rize municipalities over the past three years; it looks specifically at expenditures on the existing solid waste collection services and the revenues directly generated via the Environmental Cleansing Tax (ECT); and calculates an indicative cost per tonne for existing services; Section 1.3 contains all relevant capital and operating cost projections for the proposed investment programme and calculates indicative unit costs for the new waste disposal service; Section 1.4 presents the results of a suggested investment financing plan, identifies two alternative plans to be used for sensitivity analysis in later analysis, and sets out the loan service schedules applicable to local and foreign loans included as part of the suggested plan; Section 1.5 provides a range of possible cost recovery objectives for the new waste disposal authority and establishes indicative tariffs for each option based on the suggested financing plan. Furthermore, a sensitivity analysis is conducted to illustrate the tariff implications of the two alternative financing plans. Section 1.6 assesses sources of revenue available to fund the operating costs and debt service requirements of the programme, looking particularly at the ECT and the alternative of user charges. Section 1.7 contains an analysis of the affordability of the proposed waste management service. Assumptions The analysis is based on the following assumptions about the project and economic conditions: 1,320,580 tonnes of waste is deposited at the Sürmene landfill during its life span; The combined duration of project development and operations is 11 years ( ); Project construction occurs during the first 2 years ( ); The landfill site and associated infrastructure are operational from 1999 until site closure in 2007/8, being a 10-year operating period; Annex 4D.2-1

4 Due to the volatility of the Turkish Lira all price estimates are given in either constant or current US$ terms. No attempt has been made to project exchange rates over the development and operating period; Similarly, no attempt has been made to project Turkish inflation rates. Current US$ prices have been computed using the Index of Unit Value of Manufactured Export projected by IBRD for US$ inflation rates used are 2.0% in 1997, 2.1% in 1998, 2.3% in 1999, 2.4% in 2000, 2.3% in 2001 and 2.2%.2% thereafter. The text of the financial assessment refers to costs in both constant 1996 and current prices. Presenting cost data in constant prices allows the magnitudes of the of cost to be directly compared over time using a common basis of value. The effects of inflation are introduced to produce current prices where it is necessary to know the actual amount of money involved in financing an investment, rather than merely the value of the investment. Loan funds, for example, are normally specified in current prices which reflect the actual amount of money to be drawn down over the loan period. 1.2 TRABZON AND RIZE MUNICIPALITY FINANCE The current financial structure of the Trabzon and Rize municipalities was reviewed for an overall view of municipal finances. All cost data were provided by the accounting and finance departments of the Trabzon and Rize municipalities. The cash-basis accounting systems used by the municipalities means that all costs relate directly to cash outlays. Where necessary, estimates have been made of non-cash costs, such as depreciation. Where conversions have been made, prices have been converted from nominal Turkish Lire (TL) to nominal US dollars ($) in accordance with the following exchange rates: ,985TL/US$ ,675TL/US$ ,094TL/US$ The analysis has been left out here, but the point is made that it is important to do the financial analysis for a public investment programme within the context of the municipal budget, knowing revenue and expenditure of the municipality and particularly of the relevant Solid Waste Management body within it. 1.3 INVESTMENT PROGRAMME The investment programme consists of the total financing requirements for the whole project from 1997 to Annex 4D.2-2

5 Table 1.1 Additional Commentary on some of the Cost Categories of the Investment Schedule Category A. Capital Cost vehicles primary collection secondary collection haulage from transfer stations to landfills for site operations at transfer stations and landfills Comments Vehicle requirements should be estimated for each particular function and location of use. For example, collection vehicle requirements should be estimated on a district by district basis if this is how they are to be used. The cost schedule should show for each district the total number of each type of vehicle required over the planning period. The total number to be purchased in any year will include additional vehicles needed to meet growth in waste volumes and those needed to replace retired vehicles. Provision should also be made in the table to identify locally produced and imported vehicles (for which foreign exchange will be required). Similar schedules would be prepared for haulage vehicles operating between transfer stations and landfill sites, with numbers and costs being estimated for each route. transfer station Transfer station investment can include land purchase, site development, civil works, fixed plant and equipment and mobile plant costs. A separate schedule should be prepared for each transfer station, identifying the costs associated with each component, again distinguishing between local and foreign costs. The bulk of transfer station costs will be incurred at the time of construction, but others may be incurred later in the planning period, usually to meet increasing throughput requirements (perhaps the need for additional mobile equipment) or for equipment replacement. Where the construction programme extends over more than one year total expenditure should allocated over the development period (this is best done by multiplying the total for each item by the percentage projected expenditure in each year, thereby preserving the flexibility to make future changes). landfill site construction Landfill site investment items are similar to those for a transfer station, but with two important differences: landfill site development expenditures can be incurred throughout the planning period, to push the landfill face forward, to create disposal cells, to extend gas reclamation facilities; etc.; and land remediation costs (after care) are often incurred at the end of the planning period. Contingency An allowance is also usually made in the capital cost estimates for physical contingencies. These allow for uncertainty about the reliability of some cost estimates and for those aspects which are almost inevitably missed in an analysis of this kind. A general physical contingency is sometimes applied to the total of all capital cost estimates or, if it is known that some are more reliable than others (possibly being based on a firm quote), then different contingency allowances can be made for different components of the investment programme. Note that the level of precision in cost estimates normally rises with increasing definition of the project, and the reliability of cost estimates made after final design should be significantly greater than for those made at feasibility study stage. It follows that different physical contingency allowances should be made at the different stages of project definition. There is no standard rule for the level of the contingency allowance although, as noted above, costs do tend to be underestimated and project out-turn costs (excluding inflationary effects) are almost always higher than projected costs. For this reason it can be prudent to make a realistic provision Annex 4D.2-3

6 of up to 25% at the economic evaluation stage. Where it is suspected that the provision should be higher than this then it may be advisable to seek further advice to enable the reliability of cost estimates to be improved. B. Operating Cost Vehicles Insurance Miscellaneous Operating costs must be calculated for all operations and should, as far as possible, relate to specific units or service functions. For example, the operating costs associated with the secondary collection service for a district are likely to include: vehicle direct operating costs, vehicle repair and maintenance (R&M) costs, and vehicle labour costs (including driver and crew). Additional costs might also be incurred for staff salaries and depot R&M costs. Vehicle costs are significant and should be estimated carefully. Depending on the type of vehicle, these can be calculated in terms of direct operating costs per kilometre or per hour (e.g. for a bulldozer). This relies on information on unit fuel costs and operating efficiency (e.g. expected fuel consumption per kilometre); the latter information can come either from a supplier s specifications or, and sometimes more reliably, from local experience. Other direct cost items include tyres and lubrication. R&M is an important item. Supplier s information can again be used for this, which will normally specify an annual provision equal to a percentage of the initial capital cost. If vehicle R&M costs are calculated for a particular function care must be taken to avoid double counting these costs elsewhere in the SWM system. For example, if the strategy includes the development and operation of a vehicle depot and workshop, then the costs attributed to the workshop should exclude those attributed to the collection service via the vehicle R&M provision. Insurance is a relevant cost and should be included, but note that road licence fees and the like are transfer charges and should theoretically be excluded from the economic evaluation (but included in the financial assessment). Whether or not adjustments such as this are made depends on their likely significance for the economic outcome. Common sense is required for judgements such as this. Other operating cost items can include utilities, material supplies, and administration and other overheads (including head office salaries and related items). 1.4 INVESTMENT COSTS The investment programme is divided into Phase 1 ( ) and Phase 2 (2007). It is proposed that Phase 1 expenditures will be financed partly from foreign loans and partly from local loans and grants. Phase 2 expenditures, which are incurred during the last year of project life for the closure and restoration of the Sürmene landfill, will be financed entirely from local funds. Total investment costs include the costs for the following project components: Sürmene Sanitary Landfill; Trabzon and Rize Transfer Stations; Trabzon / Rize Clinical Waste Incinerator; Dump Site Rehabilitation; Haulage Vehicles; Institutional Establishment. Annex 4D.2-4

7 Annual expenditures for each component are estimated in 1996 constant prices and split into their local and foreign components. The original extensive expenditure tables are summarised in Table 1.2. Table 1.2 Investment Cost Summary - in Constant 1996 Prices, Including Physical Contingencies Site USD % Distribution Sürmene Sanitary Landfill Site 7,564, Trabzon Transfer Station 1,910, Rize Transfer Station 1,277, Trabzon/Rize Clinical Waste Incinerator 1, Dump Site Rehabilitation 435, Haulage Vehicles 3,453, Institutional Establishment 134, Total Physical Investment Costs - Local Portion - Foreign Portion Total Price Contingencies - Local Portion - Foreign Portion Total Investment Costs - Local Portion - Foreign Portion 15,787,200 4,761,575 11,025,625 1,290, , ,568 17,077,521 5,061,328 12,016, In addition to the main project components the overall investment plan includes provisions for the following: engineering, design and consultancy fees taken to be 10% of base investment costs; a physical contingency allowance equal to 15% of the sum of base investment costs and engineering, design and consultancy fees; price contingencies calculated from the Index of Unit Value of Manufactured Exports projected by IBRD for the period 1996 to Annual and cumulative expenditures for each project component are then set out in detail in a large spread sheet in both constant 1996 and current prices. They are illustrated in summary form in Figure 1.1. The investment cost tables contain the following: physical investment expenditures projected annually over the life of project in constant 1996 prices showing detailed work items split between foreign and local expenditures; annual engineering, design and consultancy fees projected over the life of project in constant 1996 prices; physical contingencies projected over the life of project in constant 1996 prices; price contingencies projected over the life of project in current prices; Annex 4D.2-5

8 total projected investment expenditures over the life of project. Figure 1.1 Annual and Cumulative Investment Cost US$ Annual Investment Cost US$ Cumulative Investment Cost The total investment cost including physical contingencies but before inflation is estimated to be $15.8 million, of which 70% ($11.0 million) constitutes foreign and 30% ($4.8 million) local expenditures. Total investment cost including price contingencies is estimated to be $17.1 million in current values over the investment programme of which $12.0 million is the foreign and $5.1 million the local portion. Timing of Investment Expenditures Figure 1.1 shows that the major investment expenditures will occur in the years 1998, 2001 and Of the total investment cost of $15.8 million (constant prices), 66% ($10.5 million) will be incurred in 1998, 20% ($3.2 million) in 2001, and 3% ($0.4 million) in 2007 for site remediation. Of total foreign costs of $12.0 million (current prices), 58% ($7.0 million) will be expended in 1998 and 27% ($3.2 million) in OPERATING COSTS Operating costs are based on the operational requirements of the SWM project they are taken to include both cash costs and non-cash costs (including depreciation), although only cash costs have been used in the cash flow analyses. Operating costs are estimated separately for each investment component and are categorised under four main groups: operating staff costs (managers, operators, labourers, drivers); recurrent operating costs (fuel/lubricants, electricity/water, office supplies, consumables); repair and maintenance costs (vehicles, equipment, buildings, roads); and asset depreciation costs. Operating Staff and Recurrent Costs Annex 4D.2-6

9 Operating staff and recurrent costs are estimated from the relevant operating requirements and are presented in detail in a large spreadsheet, and are summarised in Table 1.3. Minimum operating personnel requirements and current wage and salary costs have been taken into account in estimating operating staff costs. Total annual cost is estimated to be $944,300, of which labour costs account for 42%, fuel and lubricants for 24% and consumables 15%. Table 1.3 Operating Staff and Recurrent Cost Summary (in constant 1996 prices) Item USD %Distribution Operating Staff 397, Fuel/Lubricants 228, Electricity/Water 12, Office Supplies 39, Consumables 142, Others 124, Total Operating Staff and Recurrent Costs 944, Repair and Maintenance Costs Annual repair and maintenance costs are taken to be a percentage of initial investment costs (the percentage being an estimate based on experiences with similar projects), and are calculated by multiplying the cumulative investment costs by the cost ratios shown in Table 1.4, which are assumed to remain constant over the operating period. Table 1.4 Repair and Maintenance Cost Percentages (as a Percentage of Initial Investment Costs) Investment Component Local Portion (%) Foreign Portion (%) Sürmene Sanitary Landfill Site Trabzon and Rize Transfer Stations Trabzon/Rize Clinical Waste Incinerator Dump Site Rehabilitation Haulage Vehicles Institutional Establishment Annex 4D.2-7

10 Annual repair and maintenance costs are detailed in a spreadsheet again and summarised in Table 1.5. Total R&M costs are estimated to be $152,716 for years 1999 and 2000, rising to $241,263 in 2001 following additional investment expenditures in that year. Expenditures on R&M total $1,994,269 over the operating period, of which 55% is attributable to haulage vehicles, 21% to the landfill site and 16% to the Trabzon and Rize transfer stations. Table 1.5 Annual Repair and Maintenance Costs (in US$, constant 1996 prices) Investment Component Total for Period Sürmene Sanitary Landfill Site 40,590 48, ,287 Trabzon Transfer Stations 16,991 22, ,332 Rize Transfer Stations 15,013 15, ,881 Trabzon/Rize Clinical Waste Incinerator 8,826 8,826 74,436 Dump Site Rehabilitation 2,176 2,176 19,582 Haulage Vehicles 63, ,138 1,094,272 Institutional Establishment 5,364 5,364 48,272 Total Repair/Maintenance Costs 152, ,263 1,994,269 Depreciation Costs The economic life of the project is taken to be 9 years covering the operating period. All assets are depreciated fully over this period in order to develop a full cost-covering tariff. It is assumed that there are no residual asset values. Investments incurred in 2001 are depreciated over the remaining 7-year period whereas depreciation costs for the final restoration of the landfill are distributed evenly over the entire operation period. Annual depreciation costs measured in constant 1996 prices are $1,106,207 in 1999 and 2000 rising to $1,939,255 over the remaining period. Total Operating Costs Total annual operating costs are summarised in Table 1.6. These are estimated to be $2.2 million in years 1999 and 2000 rising to $3.1 million thereafter. Depreciation constitutes the largest cost component, being 60% of the aggregate total for the period. Cash operating costs (excluding depreciation), estimated to be $1.1 million for years 1999 and 2000 and $1.2 million thereafter, comprise 40% of the total for the period. Annex 4D.2-8

11 Table 1.6 Total Annual Operating Cost Summary (in US$, constant 1996 prices) Item Total for Period %Distribution Operating Staff 397, ,000 3,573, Fuel/Lubricant 228, ,800 2,059, Electricity/Water 12,500 12, ,500, Office Supplies 39,000 39, , Consumables 142, ,400 1,281, Others 124, ,600 1,121, Total Operating Staff and Recurrent Costs Repair/Maintenance Costs 944, ,300 8,498, , ,263 1,994, Depreciation Costs 1,106,207 1,939,225 15,787, Total Operating Costs 2,203,223 3,124,818 26,280, UNIT COST Unit costs (or average incremental costs) are estimates of the average total cost per tonne of waste collected and disposed of over the project period (taking account of both capital and operating costs). They provide an indication of the tariff level which would be required to be levied per tonne of waste collected to achieve full cost recovery of the SWM service. They are calculated using discounted cash flow analysis by dividing the present value of the projected investment and cash operating costs over the project period by the present value of the projected waste stream over the same period. The present value of the time stream of revenues generated by multiplying the unit cost calculated in this manner by the annual waste quantity is then equal to the present value of the cost stream (at the selected discount rate). That is, the unit cost represents the tariff which, if applied to the total waste stream over the life of project, would generate revenues just sufficient to achieve full cost recovery. This depends, however, on the extent to which the discount rate chosen properly reflects the opportunity cost of capital to the project. In this section unit costs are calculated for a range of discount rates to give an indication of the likely range of the required tariff level purely on the basis of estimates of capital and operating cash costs. Since financing arrangements can influence a project s unit costs, the analysis is refined once a detailed financing plan has been defined. If, for example, part of the investment programme is proposed to funded out of nonrepayable grants, then the effect will be to reduce the total costs to be Annex 4D.2-9

12 recovered and will lower the overall unit cost. Similarly, unit costs, (and therefore tariffs), are influenced by loan interest and repayment terms. The analysis is divided into two parts. The first establishes unit costs for the overall development programme, and the second looks specifically at the unit costs of the two transfer stations. This is to gauge the cost implications of the significantly different volumes of waste being processed through each station. Overall Project The following assumptions are made in calculating the unit costs: the analysis is based on capital and operating cash costs only and does not consider the effects of financing arrangements; unit costs are calculated for a range of real (before inflation) discount rates to establish upper and lower bounds for possible tariff levels; physical assets have no residual value when operations cease in the year 2007; and the total amount of solid waste to be disposed of at the Sürmene site between 1999 and 2007 is taken to be 1,320,580 tonnes. Results of this analysis are set out in detail in a spreadsheet and are summarised here for demonstration purposes in Table 1.7, where the total unit cost of the project is shown to vary between $19.9 and $26.4 per tonne for the range of discount rates 0% to 12% p.a. Table 1.7 Unit Project Costs (US$/Tonne, constant 1996 prices) Investment Operating Total Real Discount Rate (%) Cost ($/t) Cost ($/t) Cost ($/t) If a real discount rate of 5% is taken to be representative of the overall cost of capital to the project (this being about 7% in nominal terms, and roughly equal to the interest rate expected to be charged on an IBRD loan) then an average tariff of about $22.5/tonne would seem reasonable for the waste collection, transfer, haulage and disposal function. Cost recovery and tariffs are considered further in Section 1.8. Transfer Station A separate component calculation for unit transfer station cost is conducted in order to facilitate an easy comparison between both alternative locations. The unit costs of transfer station operations are calculated by dividing the present value of projected transfer station investment and operating costs by the Annex 4D.2-10

13 present value of future solid waste throughputs to each station. Total throughputs to the Trabzon and Rize transfer stations over the total operating period are taken to be 858,503 tonnes and 293,264 tonnes, respectively. Unit transfer station costs are calculated in details and summarised in Table 1.8. The unit cost of the Rize transfer station is more than double that of the Trabzon station. This is because investment costs for the Rize station are about two-thirds those of Trabzon, whereas the waste throughput is only one-third. Thus unit costs for the Trabzon station vary from $3.3 to $4.8 per tonne over the range of discount rates, whereas those for Rize vary from $7.0 to $10.3 per tonne. At the 5% discount rate unit costs of the Trabzon and Rize transfer stations are estimated to be $3.9 and $8.3 per tonne, respectively. The contribution of investment costs in total transfer station costs is about 74% for Trabzon and 69% for Rize. Table 1.8 Unit Transfer Station Costs (US$/Tonne, constant 1996 prices) Real Discount Rate Investment Cost Operating Cost Total Cost A. Trabzon Transfer Station B. Rize Transfer Station INVESTMENT FINANCE Introductory Comments In devising an investment financing plan for the development programme it has been assumed that an independent and autonomous body will be established as the borrower of the foreign and domestic loans and will be responsible for project implementation and operation of the facilities. Annex 4D.2-11

14 Clearly, such a new institution will be unable to stand alone financially from its inception - indeed, an aim of the project is to establish the institutional and financial conditions through which such entities can be created with a realistic expectation of their becoming successful commercial organisations. An objective of the current project is to demonstrate that such a body can become commercially independent over time, and to establish its capacity to raise funds in its own right. Initially, however, any loans raised on its behalf will almost certainly have to be guaranteed by the national government. The organisation will need to operate within a strict commercial discipline to ensure that it is given the best possible opportunity to demonstrate its commercial viability as a stand-alone entity. This will, of course, depend crucially on the organisation having the necessary legal powers through which it can exercise its obligations, including the ability to charge for its services and recover its costs. This aspect is discussed further in Section 7.6. In structuring possible project financing, investment requirements are analysed in two phases. Phase 1 covers the five-year period 1997 to 2001, and Phase 2 the last year of operations, 2007, during which expenditures on the final covering of the Sürmene landfill site will be incurred. The total investment cost to be financed amounts to $17.1 million in current prices, as described in Section 1.3. Table 1.9 Total Investment Costs (in current US$ prices) Investment Costs Total Local Portion 4,475, ,551 5,061,328 Foreign Portion 10,266,858 1,749,335 12,016,193 Total 14,742,634 2,334,887 17,077, Suggested Financing This section develops a suggested financing plan for the project, consisting of a mix of local and foreign loans, and central and local government grants. As with any proposed financing at this stage of project development there are no guarantees that the sources or amounts of funds indicated will necessarily be available. This will need to be determined in project discussions and negotiations carried out after submission of this report. The suggested financing is a starting point from which such dialogue can begin. Nevertheless, it is recognised that the suggested financing structure may have overestimated or underestimated the scope of particularly favourable funding sources, especially government grant funds, and alternative financing options based on greater or lesser contributions from these sources are defined in the following section. Annex 4D.2-12

15 Five potential sources of funds have been identified for the project: Foreign Loans (i.e. IBRD, EBRD) Domestic Loans Municipal Contributions National Governmental Grants Internal Sources. Possible contributions from each source are considered below. All amounts are given in current (inflation adjusted) US$. Foreign Loans For the purpose of the following analysis it is assumed that the IBRD will fund the foreign component of investment funds required for Phase 1 of project development ( ). All other investment finance, including the foreign component of Phase 2 (2007), will be funded out of local sources. Phase 1 foreign costs amount to $10.27 million. This represents almost 70% of Phase 1 and 60% of total investment expenditures. It is assumed that the loan will have a 5 year grace period, with principal repayments beginning in 2002 spread over 12 years. An interest rate of 7% and commitment fees of 0.25% per annum are assumed. It is suggested that the IBRD finance could be disbursed through three loans: $46,000 in 1997; $7.0 million in 1998; and $3.2 million in Domestic Loans It is proposed that domestic commercial loan funds will be utilised during both Phases of project development, in the amounts of $1.47 million in Phase 1 and $0.93 million in Phase 2. This represents 10% of Phase 1, 40% of Phase 2 and 14% of overall investments. Domestic commercial loans are assumed to have a grace period of 2 years with a repayment period of 3 years at an interest rate of 9% p.a. (US$ denominated loans) Municipal Contributions It is expected that the municipalities involved will contribute partially to the financing of the initial investment costs (in a sense as share capital). At this stage, however, no commitments have been made by the municipalities with respect to what, if any, their contributions will be. Total municipal contributions of $1.47 million in Phase 1 and $0.23 million in Phase 2 have been assumed, these being 10% of the required funds for each stage. Annex 4D.2-13

16 National Government Grants Given the nature of the project - a pilot programme designed to address a key aspect of Turkey s agenda for environmental improvement - it is assumed that the central government will support it by way of grant funding. As with the projected municipal contributions there is, however, no certainty at this stage that such funds will be provided or, if so, in what amounts. It is assumed that the central government will provide 10.4% of funds required for Phase 1 and 10% of those for Phase 2, in the amounts of $1.53 million and $0.23 million, respectively. Clearly, the availability of grant funds from local and national government sources is a crucial element of the proposed financing. Without significant contributions from these sources it is unlikely that the project can proceed. There are two reasons for this: a shortfall in grant funds would involve a greater reliance on loan funds which, even if they were available, would increase the project s revenue requirement to cover higher debt service charges; and failure to provide funding assistance would demonstrate a lack of commitment by the public sector to the development programme and its objectives, thereby undermining its chances of success. The importance of non-repayable grant finance for the project is demonstrated further in Section in which a sensitivity analysis considers the implications for cost recovery tariffs of two alternative funding scenarios based on optimistic and pessimistic assumptions about the level of government funds available to the project. Internally Generated Funds It is proposed that tariffs should be at a level which will allow funds to be accumulated over and above those needed to cover direct operating costs and debt services charges. It is therefore assumed that internally generated funds will be available in year 2007 to cover 40% ($0.93 million) of Phase 2 site remediation costs. This represents 5.5% of total project costs. Cost recovery objectives and tariffs are covered in detail in Section 1.5. Annex 4D.2-14

17 Table 1.10 Suggested Investment Financing Option Finance Source Total A. In Current US$ Prices IBRD Loan 10,266,858-10,266,858 Domestic Loan 1,474, ,955 2,408,218 Municipal Contributions 1,474, , ,752 Government Grants 1,527, ,489 1,760,738 Internal Sources - 933, ,955 Total 14,742,634 2,334,887 17,077,521 B. In Constant 1996 US$ Prices IBRD Loan 9,651,375-9,651,375 Domestic Loan 1,416, ,700 2,150,584 Municipal Contributions 1,668, ,425 1,600,309 Government Grants 1,467, ,425 1,651,232 Internal Sources - 733, ,700 Total 13,952,950 1,834,250 15,878,200 C. As a percentage of Total Finance (in current prices) IBRD Domestic Loan Municipal Contributions Government Grants Internal Source Total It can be seen from Table 1.10 that almost 80% of Phase 1 financing is projected to be by way of loans and 20% by grants. The following section defines two alternative financing structures Alternative Financing Scenarios The project financing developed above provides a basis around which future discussions and negotiations on a final financing plan can be focused. In order to indicate the implications for future cost recovery this section sets out the conditions assumed for two alternative scenarios, based on more optimistic and more pessimistic assumptions. Annex 4D.2-15

18 The alternatives are defined by varying the relative contributions made to the project by domestic loans and by national government grants. Contributions from the IBRD, municipal grants and internal resources are assumed to stay as for the suggested financing. Details of the percentage contributions made to the overall financing by the different sources are summarised in Table 1.. Optimistic Scenario For this scenario it is assumed that the domestic loan component of Phase 1 is replaced entirely by an increase in the amount of grant funds provided by the national government, thereby increasing its contribution to 20.4%. The domestic loan component in Phase 2 is reduced from 40% to 30%, with a corresponding increase in the national government grant from 10% to 20%. The overall financing thus becomes 70% loans and 30% grants for Phase 1, and 30% loans and 70% grants (including internal sources) for Phase 2. Pessimistic Scenario This scenario assumes that no national government funds are available and that the shortfall is made up entirely by a corresponding increase in the domestic loan component of both Phases. The overall financing thus becomes 90% loans and 10% grants for Phase 1, and 50% loans and 50% grants (including internal sources) for Phase 2. Table 1.11 Suggested, Optimistic and Pessimistic Investment Financing Scenarios (as a percentage of total financing) Finance Source Suggested Scenario Optimistic Scenario Pessimistic Scenario IBRD Loan Domestic Loan Municipal Contributions Government Grants Internal Sources TOTAL Debt Service Schedules The credit repayment schedules for the IBRD and domestic loans for the suggested financing option are included in the cash flow tables used to assess the effects of different tariff levels in Section 1.5. Under the proposed loan conditions the domestic loan will be repaid in year 2012 and the IBRD loan in year Under these circumstances debt service obligations will continue for a significant period after the closure of the Annex 4D.2-16

19 Sürmene landfill site. The amount of total debt outstanding at the end of year 2007 is calculated to be $5.43 million measured in constant 1996 values. Section considers the cost recovery and tariff implications of various cash flow objectives, including the option of accumulating sufficient funds internally to repay all outstanding debt obligations in the final year of operations Environmental Pollution Prevention Fund (EPPF) Credits Although not considered in the above financing proposals, another potential source of investment finance for the project is the Environmental Pollution Prevention Fund (EPPF). This fund, which grants credits to environmental projects with the approval of the Minister of the Environment, has largely been used to date to finance the procurement of solid waste trucks, septic tankers and similar vehicles. However, being a pilot project supported by the World Bank, and part of an overall high priority strategy it would seem very likely that funds might also be available from this source. When used for solid waste investments EPPF credits have a grace period of 2.5 years and a repayment period of 7.5 years (a total of 10 years maturity) with a nominal TL interest rate of 45% (compared with a current average domestic inflation rate of 80% such credits are offered at heavily subsidised rates, featuring double digit negative rates in real terms). 1.8 COST RECOVERY AND TARIFF LEVELS This Section considers the tariff implications of achieving various cash flow objectives. Section identifies and discusses three alternative cost recovery objectives. Section establishes the tariff levels needed to meet each of these objectives. Section assesses the implications for projected tariff levels of the alternative financing scenarios presented in Section Cost Recovery and Cash Flow Objectives Three possible cost recovery objectives are identified for consideration in this section, each of which has different implications for the tariff level required for the following objectives to be met: 1. Covering all cash outflows to the end of the project period, including provision for residual debt and making some provision for asset replacement; 2. Covering all cash outflows to the end of the project period, including provision for residual debt, but making no provision for asset replacement; and 3. Covering all cash outflows (including debt service) to the end of the project period, but ignoring residual debt outstanding at the end of 2007, and making no provision for asset replacement. The first option recovers costs fully, and maintains equity (grant) contributions for application towards future facilities. The second does not Annex 4D.2-17

20 recover costs fully, but does recover debt. The third does not recover costs fully and only partially recovers debt Tariff Requirements This section calculates the tariffs required to meet each of the three cost recovery objectives for the financing structure suggested in Section 1.7. The analysis is based on cash flow statements generated by taking operating cash outflows, investment expenditures, debt service and working capital requirements into account. Working capital requirements are estimated by assuming that waste disposal charges are collected 30 days after billing (i.e. one month equivalent of accounts receivable); and, that operating cash outflows excluding staff costs are made 30 days after accrual (i.e. one month equivalent of accounts payable). Objective 1: Sufficient cash for outstanding loans & new investments This is the most comprehensive cost recovery objective, in which sufficient funds are accumulated at the closure of the Sürmene landfill site in year 2007 to repay all outstanding debt and to make a significant contribution towards the investment costs of replacing the landfill. The tariff level required to meet this objective for the proposed financing structure is estimated to be $24 per tonne of solid waste collected in 1996 constant prices throughout the operating period. (The detailed cash flow statements for this objective were contained in an Annex, where they were presented in both constant 1996 and current prices.) The following points are noted in relation to the cash flow statements (in constant 1996 prices): Total waste disposal charges over the operating period amount to $31.7 million. Investment finance sources (excluding internal fund contributions) amount to $15.1 million of which $9.7 million is the IBRD loan, $2.1 million the domestic loan, $1.6 million the municipality contributions and $1.7 million the national governmental grants. Out of total cash inflows of $47.1 million between 1997 and 2007 the shares of waste disposal charges and investment finance sources are 67.2% and 31.9%, respectively. For the financing of interest expenses and commitment fees incurred in 1997 and 1998 before operations begin municipal sources of $0.4 million need to be allocated (shown in the cash flow statements as municipal sources for working capital). Operating cash outflows amount to $10.5 million (22.3% of total cash inflows) between 1999 and 2007 of which staff costs are $3.6 million, repair & maintenance $2.0 million, and fuel & lubricants $2.1 million. Debt service requirements of the foreign and domestic loans amount to $10.1 million between 1997 and 2007 of which principal repayments are $4.8 million and interest expenses and commitment fees $5.3 million. Annex 4D.2-18